$US14bn write-down fells Rio’s CEO

Sam Walsh, in London on Thursday night, said he was honoured to be given the opportunity to lead Rio. He will move from Perth to London and his target remuneration will rise by 15 per cent to $7.8 million.
Photo: Julian Andrews

Rio Tinto
has elevated iron ore head
Sam Walsh
to be chief executive after the mining giant announced one of the biggest write-downs in Australian corporate history, taking $US14 billion in impairment charges on its aluminium and coal businesses.

Rio chairman
Jan du Plessis
said the board acknowledged that such large write-downs to the Mozambican coal assets, representing three-quarters of the cost of the acquisition made less than two years ago, was unacceptable.

“We are also deeply disappointed to have to take a further substantial write-down to our aluminium business, albeit in an industry that continues to experience adverse changes ­globally," he said.

Mr du Plessis told The Australian Financial Review there would be no change in the miner’s strategic direction despite the sudden management moves. “The strategy of the ­company is set by the board and ­influenced by the recommendations of the executive committee, and that will not change," he said.

The market had expected Rio to write down assets alongside the release of its annual results next month but the scale was surprising. Investors are frustrated by poor investment decisions made by big mining companies during the later stages of the mining boom, prompting Rio and BHP Billiton to shelve new projects in 2012.

Well regarded

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“Sam Walsh is reasonably well regarded. I would be keen to get a bit of perspective of the thinking behind the [succession] process. Was there a wider search?" said Marcus Fanning, head of Australian equities at Colonial First State. “In light of recent write-offs at both Rio and BHP, the large resource companies in their growth phase on the back of higher commodity prices, I think some shareholders expressed some frustration of not ­getting a greater share of the ­commodity price boom."

Since 2007 BHP has taken $US9.5 billion of write-downs, including on its Ravensthorpe nickel project and US shale gas assets. Rio has made nearly $US35 billion of write-downs in the same period. As a result of the write-down on the Riversdale assets, Doug Ritchie, who led the acquisition as energy boss and had been appointed as head of strategy, also stepped down by “mutual agreement".

Mr Walsh, 63, has been a member of Rio’s board since 2009 and on the executive committee since 2001. As head of the iron ore business, he oversaw a division that produced 82.5 per cent of Rio’s profits in 2011. Rio did not conduct an external search to replace Mr Albanese.

Mr Walsh, who said he was honoured to be given the opportunity to lead Rio, will move from Perth to London and his target remuneration will rise by 15 per cent to $7.8 million.

His appointment comes at a time where Rio’s management was already in flux. Chief financial officer Guy Elliott has flagged plans to step down later this year and no replacement has yet been appointed. Mr Walsh is expected to appoint a new senior executive team, including a replacement iron ore head.

Mr Albanese had led the company since May 2007 and survived a strong push from investors for his sacking during the global financial crisis after the miner’s $US38 billion acquisition of Alcan proved disastrous to its balance sheet and he pushed for a rescue by ­Chinese state-owned group Chinalco that was later abandoned.

Albanese recognises accountability

Mr Albanese said he recognised that while Rio was now in good shape, accountability for all aspects of the business rested with the chief executive.

“I am pleased that someone of Sam’s calibre and values has been chosen to succeed me as chief executive," he said.

Including the latest write-downs, Rio made $US29 billion of impairments on its aluminium business while Mr Albanese was leading the company.

Following lower commodity prices last year, Rio’s annual earnings (excluding write-downs) are expected to fall 40 per cent to $US9.32 billion for 2012. But in November, Rio unveiled a plan to strip $US5 billion of costs – or around 10 per cent of its total – from the business by the end of 2014, in a move that was well received by the market. The write-downs announced on Thursday mean the company will report a bottom line loss of around $US4 billion to $US5 billion.

Rio said the write-downs to the Mozambican coal assets were made because the development of infrastructure for coal exports had proved more challenging than expected and recover­able coking coal resource volumes had been downgraded. It will also take a number of smaller asset write-downs totalling $US500 million.

Mr Albanese and Mr Ritchie will step down effective from Thursday but will not leave the company until July 2013 to assist in a transition of global stakeholder relationships.